A San Francisco federal judge has dismissed without prejudice allegations that Sutter Health, a large hospital system in northern California, unreasonably restrained trade and monopolised the market for healthcare services in northern California through imposing tying and exclusive dealing arrangements in its contracts with health plans.(1) US Magistrate Judge Laurel Beeler dismissed the class action complaint because it contained conclusory allegations that failed to provide factual support showing that Sutter engaged in predatory conduct or imposed supra-competitive prices.
The lawsuit originated in September 2012 when two Sutter customers filed a class action lawsuit on behalf of a putative class consisting of any person in northern California who had been enrolled in a licensed healthcare service plan since September 2008 that had a contractual relationship with Sutter. The complaint alleges that Sutter required health plans to use Sutter providers or affiliated physician groups - even if lower-priced alternatives were available - or be denied access to any Sutter facility. The plaintiffs also alleged that Sutter's contracts require health plans to incentivise the use of Sutter services and penalised plan members who fail to use them. The plaintiffs claimed that the putative class had had to pay "at least several thousand dollars per year" more for healthcare services as a result of Sutter's contracts.
Beeler dismissed nearly all of the plaintiffs' claims under Bell Atlantic v Twombly(2) as lacking sufficient factual support for what he characterised as simply conclusory allegations. For example, Beeler dismissed the plaintiffs' claims of tying and exclusive dealing because the complaint failed to include allegations that Sutter had mandated that patients could choose only Sutter providers. While the plaintiffs alleged that Sutter required health plans to include all Sutter providers in-network and to "actively encourage" patients who used Sutter providers to use other Sutter providers, there were no allegations that health plans could not include non-Sutter providers in-network or direct patients to non-Sutter providers.
Beeler also found fault with the product and geographic market allegations. The plaintiffs alleged that the relevant product market was "the provision of health care and related services", which included but was not limited to:
- in-patient hospital services;
- out-patient hospital services;
- physician services;
- services of other providers such as nurses, optometrists, psychologists or nutritionists;
- diagnostic laboratory services;
- home health services;
- physical or occupational therapy;
- preventive health services;
- emergency services;
- hospice services;
- chemical dependency services; and
- psychiatric services.
Beeler ruled that this was an insufficient product market because the plaintiffs failed to plead "specific product markets" and it was not a case where all of the services could be combined into a single relevant market. The complaint also contained insufficient allegations of a relevant geographic market because it simply pled a market consisting of "an amorphous region of 22 counties that is not tethered to any factual allegations about Sutter's market power".
Despite dismissing the plaintiffs' substantive claims, Beeler did uphold the plaintiffs' antitrust standing to pursue the case, at least at the 'motion to dismiss' phase. Although the complaint did not specifically allege that the plaintiffs were actual Sutter customers, Beeler found sufficient to survive a motion to dismiss the allegations that the plaintiffs have had to pay higher premiums, co-payments and out-of-pocket costs for other services. The plaintiffs therefore have 28 days from the date of the decision to amend and re-file the complaint, and have indicated that they intend to do so.
Overall, the dismissal marks a short-term win for Sutter and provides insight into the high level of particularity and factual support required to plead a private antitrust suit successfully. The decision is also noteworthy for the following reasons:
- At the motion to dismiss phase under Twombly, mere allegations of predatory conduct were not enough to establish a valid antitrust lawsuit. Private plaintiffs must back such allegations up with concrete factual support for each essential element of the violations alleged.
- Antitrust challenges to the contracting practices of a healthcare system are uncommon, but as demonstrated by this lawsuit, they can and do occur. Of course, it remains to be seen whether the plaintiffs will amend and re-file a complaint capable of withstanding Sutter's motion to dismiss.
- At a time of increasing healthcare consolidation, providers and insurers should remain cautious of lawsuits not just from antitrust enforcement agencies and other healthcare entities, but from private consumers as well.
On a related note, the recent spike in healthcare provider consolidation has garnered a significant amount of attention as speculation grows about how it is affecting market competition. The American Hospital Association and the Centre for Healthcare Economics and Policy recently released a report concluding that hospital mergers and acquisitions generally result in higher quality and more efficient care. The report finds that the "overwhelming majority of those transactions are procompetitive and fully support the twin goals of higher quality and more affordable health care".(3)
For further information on this topic please contact Robert F Leibenluft or Caitlin Russo at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (firstname.lastname@example.org or email@example.com).
(1) Available at http://f.datasrvr.com/fr1/413/99530/Sutter_Order.pdf.
(3) Available at www.aha.org/research/policy/2013.shtml.
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